The payoff of an option is a relatively straightforward calculation based upon the type of the option and is derived from the price of the underlying security on expiry relative to the strike price. The formula for the call option payoff is as follows:
The formula for the put option payoff is as follows:
We will model both of these functions and visualize their payouts.
An option gives the buyer of the option the right to buy (a call option) or sell (a put option) an underlying security ...